Pimco's El-Erian: Europe Faces 'Difficult Balancing Act'

European governments have no best solution to the sovereign-debt crisis, according to Mohamed El- Erian, chief executive officer of Pacific Investment Management Co., which runs the world’s biggest bond fund.

“The Europeans are operating in a world of second and third bests,” El-Erian said in Bloomberg Radio interview on “Bloomberg Surveillance” with Tom Keene. “There is not first best. They look at the benefits and the costs. It’s a very difficult balancing act right now.”

The cost of insuring European sovereign debt has climbed to a record as the crisis that last year led to 178 billion euros ($232 billion) in European Union and International Monetary Fund aid for Greece and Ireland threatened to claim Portugal as its next victim.

The euro, down about 10 percent against the dollar over the past year, was up 0.5 percent to $1.3034 at 9:52 a.m. in New York.

European governments are considering aid for Portugal, debt buybacks, lower interest rates on rescue loans and guarantees against excessive debt as part of a package to quell the financial crisis, according to two people with direct knowledge of the talks.

The plan, which may include a loan to Portugal of about 60 billion euros and purchases of outstanding Greek debt, would mark an attempt to contain a crisis that has frustrated unprecedented efforts by policy makers to calm markets and raised questions about the health of the 17-nation euro economy.

‘Pile New Debt’

“The mindset today is let’s pile new debt on top of old debt, and that does not address the problem,” El-Erian said. “You need a mindset change that says let’s look at the fundamentals and let’s look at this as a solvency issue instead of a liquidity issue. That mindset will come when either the market forces it or when the underlying institutions are strong enough for that change.”

Portugal’s borrowing costs fell at a sale of 10-year bonds today. Portugal sold 599 million euros of bonds due in 2020 at a yield of 6.716 percent, the country’s debt management agency said. That compares with 6.806 percent at the previous auction on Nov. 10. The government also placed 650 million euros of bonds due in 2014 at a yield of 5.396 percent, up from the 4.041 percent on Oct. 27.

“It’s critical to stop the upward migration of spread widening because if you get to Spain then it’s really systemic because after Spain is Italy,” El-Erian said. “You cannot run advanced economies at those levels.”

Pimco, a unit of the Munich-based insurer Allianz SE, manages $1.236 trillion of assets as the world’s biggest manager of bond funds.

European governments have no best solution to the sovereign-debt crisis, according to Mohamed El- Erian, chief executive officer of Pacific Investment Management Co., which runs the world s biggest bond fund.
The Europeans are operating in a world of second and third...